**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-Q**

 

**(Mark One)**

 

**x****        QuarterlyReport Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**

 

**For the quarterly periodended June 30, 2006 or**

 

**o****        TransitionReport Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**

 

**For the transition period from                        to                        **

 

**Commission filenumber 1-16017**

** **

**ORIENT-EXPRESSHOTELS LTD.**

(Exactname of registrant as specified in its charter)

 

| **Bermuda**                               | ** ** | **98-0223493**       |
|-------------------------------------------|------------|----------------------|
| (State or other  jurisdiction             |       | (I.R.S. Employer     |
| of incorporation  or                      |       | Identification  No.) |
| organization)                             |       |                 |
|                                      |       |                 |
| **22  Victoria Street**                   |       |                 |
| **P.O.  Box HM 1179**                     |       | ** **           |
| **Hamilton  HMEX, Bermuda**               |       | ** **           |
| (Address of principal  executive offices) |       | (Zip Code)           |

 

**441-295-2244**

(Registrant’s telephonenumber, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes x No  ̈

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, or a non-acceleratedfiler.  (See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act).

 

Large Accelerated Filer x     AcceleratedFiler  ̈     Non-AcceleratedFiler  ̈

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ̈  No x

 

As of July 31, 2006, 42,033,250 Class A common shares and 18,044,478Class B common shares of Orient-Express Hotels Ltd. were outstanding. All ofthe Class B shares are owned by a subsidiary of Orient-Express Hotels Ltd.

 

 

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**PART I –FINANCIAL INFORMATION**

**ITEM1.   Financial Statements**

**Orient-Express Hotels Ltd. andSubsidiaries**

**Condensed Consolidated BalanceSheets (unaudited)**
| ** **                                                                               | ** ** | **June 30,  2006**              | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|
| ** **                                                                               | ** ** | **(Dollars in thousands)** | ** ** |
|                                                                                     |       |                                 |       |                        |       |
| **Assets**                                                                               | ** ** | ** **                           | ** ** | ** **                  | ** ** |
| Cash and cash equivalents                                                                |       | $                                    | 55,937     |                        | $          | 38,397 |   |
| Accounts receivable,  net of allowances of $1,182 and $980                               |       | 65,980                               |       | 59,061                      |       |
| Due from related  parties                                                                |       | 18,204                               |       | 17,549                      |       |
| Prepaid expenses and  other                                                              |       | 16,587                               |       | 13,061                      |       |
| Inventories                                                                              |       | 32,958                               |       | 29,636                      |       |
| Real estate assets                                                                       |       | 15,084                               |       | 12,149                      |       |
| Total current assets                                                                     |       | 204,750                              |       | 169,853                     |       |
|                                                                                     |       |                                 |       |                        |       |
| Property, plant and  equipment, net of accumulated depreciation of $185,526 and $164,814 |       | 1,094,652                            |       | 1,017,175                   |       |
| Investments                                                                              |       | 136,153                              |       | 129,681                     |       |
| Goodwill and other  intangible assets                                                    |       | 74,271                               |       | 62,867                      |       |
| Other assets                                                                             |       | 41,316                               |       | 35,986                      |       |
|                                                                                     |       | $                                    | 1,551,142  |                        | $          | 1,415,562 |   |
| **Liabilities and Shareholders’  Equity**                                           |       |                                 |       |                        |       |
| Working capital  facilities                                                              |       | $                                    | 48,697     |                        | $          | 47,108 |   |
| Accounts payable                                                                         |       | 30,534                               |       | 22,680                      |       |
| Due to related parties                                                                   |       | 3,292                                |       | 7,374                       |       |
| Accrued liabilities                                                                      |       | 62,680                               |       | 43,545                      |       |
| Deferred revenue                                                                         |       | 30,158                               |       | 19,339                      |       |
| Current portion of long-term  debt and capital leases                                    |       | 82,353                               |       | 72,151                      |       |
| Total current  liabilities                                                               |       | 257,714                              |       | 212,197                     |       |
|                                                                                     |       |                                 |       |                        |       |
| Long-term debt and obligations  under capital leases                                     |       | 566,941                              |       | 496,156                     |       |
| Deferred income taxes                                                                    |       | 31,262                               |       | 29,656                      |       |
|                                                                                     |       | 855,917                              |       | 738,009                     |       |
| Minority interest                                                                        |       | 1,588                                |       | 4,153                       |       |
|                                                                                     |       |                                 |       |                        |       |
| Shareholders’ equity:                                                               |       |                                 |       |                        |       |
| Preferred shares  $0.01 par value (30,000,000 shares authorized, issued nil)             |       | —                               |       | —                      |       |
| Class A common  shares $0.01 par value (120,000,000 shares authorized):                  |       |                                 |       |                        |       |
| Issued–39,513,750  (2005 – 39,399,750)                                         |       | 393                                  |       | 393                         |       |
| Class B common  shares $0.01 par value (120,000,000 shares authorized):                  |       |                                 |       |                        |       |
| Issued–18,044,478  (2005–18,044,478)                                           |       | 181                                  |       | 181                         |       |
| Additional paid-in  capital                                                              |       | 406,969                              |       | 404,923                     |       |
| Retained earnings                                                                        |       | 324,497                              |       | 314,207                     |       |
| Accumulated other  comprehensive loss                                                    |       | (38,222                              | )          | (46,123                     | )          |
| Less: reduction due to  Class B common shares owned by a subsidiary – 18,044,478    |       | (181                                 | )          | (181                        | )          |
| Total shareholders’  equity                                                         |       | 693,637                              |       | 673,400                     |       |
| Commitments and contingencies                                                            |       |                                 |       |                        |       |
|                                                                                     |       | $                                    | 1,551,142  |                        | $          | 1,415,562 |   |

 

See notes to condensed consolidated financial statements.

2

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**Orient-Express Hotels Ltd. andSubsidiaries**

**Statements of CondensedConsolidated Operations (unaudited)**
| **Three months ended June 30,**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **(Dollars in thousands, except per share amounts)** | ** ** |
| ** **                                                                         |       |     |       |     |       |
| Revenue                                                                            |       | $        | 134,705    |     | $          | 126,252 |   |
|                                                                               |       |     |       |     |       |
| Expenses:                                                                          |       |     |       |     |       |
| Depreciation and  amortization                                                     |       | 9,296    |       | 8,632    |       |
| Operating                                                                          |       | 62,272   |       | 58,351   |       |
| Selling, general  and administrative                                               |       | 36,584   |       | 34,975   |       |
| Total expenses                                                                     |       | 108,152  |       | 101,958  |       |
|                                                                               |       |     |       |     |       |
| Earnings from  operations before net finance costs                                 |       | 26,553   |       | 24,294   |       |
| Gain on sale of  investment                                                        |       | 6,619    |       | —   |       |
|                                                                               |       |     |       |     |       |
| Interest expense, net                                                              |       | (9,981   | )          | (6,726   | )          |
| Foreign currency, net                                                              |       | (3,478   | )          | 495      |       |
| Net finance costs                                                                  |       | (13,459  | )          | (6,231   | )          |
|                                                                               |       |     |       |     |       |
| Earnings before income  taxes                                                      |       | 19,713   |       | 18,063   |       |
|                                                                               |       |     |       |     |       |
| Provision for income  taxes                                                        |       | (3,167   | )          | (3,420   | )          |
|                                                                               |       |     |       |     |       |
| Earnings before  earnings from unconsolidated companies                            |       | 16,546   |       | 14,643   |       |
|                                                                               |       |     |       |     |       |
| Earnings from  unconsolidated companies, net of tax                                |       | 3,326    |       | 3,814    |       |
|                                                                               |       |     |       |     |       |
| Net earnings on class A  and class B common shares                                 |       | $        | 19,872     |     | $          | 18,457 |   |
|                                                                               |       |     |       |     |       |
| Net earnings per class  A and class B common share:                                |       |     |       |     |       |
| Basic and  diluted                                                                 |       | 0.50     |       | 0.47     |       |
|                                                                               |       |     |       |     |       |
| Dividends per class A and class B common share                                     |       | 0.025    |       | 0.025    |       |

 

See notes to condensed consolidated financial statements.

3

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**Orient-Express Hotels Ltd. andSubsidiaries**

**Statements of CondensedConsolidated Operations (unaudited)**
| **Six months ended June 30,**                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **(Dollars in thousands, except per share amounts)** | ** ** |
| ** **                                                                         |       |     |       |     |       |
| Revenue                                                                            |       | $        | 213,956    |     | $          | 206,741 |   |
|                                                                               |       |     |       |     |       |
| Expenses:                                                                          |       |     |       |     |       |
| Depreciation and  amortization                                                     |       | 18,680   |       | 16,450   |       |
| Operating                                                                          |       | 103,001  |       | 99,680   |       |
| Selling, general  and administrative                                               |       | 68,813   |       | 66,398   |       |
| Total expenses                                                                     |       | 190,494  |       | 182,528  |       |
|                                                                               |       |     |       |     |       |
| Earnings from  operations before net finance costs                                 |       | 23,462   |       | 24,213   |       |
| Gain on sale of  investment                                                        |       | 6,619    |       | —   |       |
|                                                                               |       |     |       |     |       |
| Interest expense, net                                                              |       | (18,973  | )          | (13,805  | )          |
| Foreign currency, net                                                              |       | (2,796   | )          | 4,075    |       |
| Net finance costs                                                                  |       | (21,769  | )          | (9,730   | )          |
|                                                                               |       |     |       |     |       |
| Earnings before income  taxes                                                      |       | 8,312    |       | 14,483   |       |
|                                                                               |       |     |       |     |       |
| Provision for income  taxes                                                        |       | (1,203   | )          | (3,122   | )          |
|                                                                               |       |     |       |     |       |
| Earnings before  earnings from unconsolidated companies                            |       | 7,109    |       | 11,361   |       |
|                                                                               |       |     |       |     |       |
| Earnings from  unconsolidated companies, net of tax                                |       | 5,152    |       | 5,539    |       |
|                                                                               |       |     |       |     |       |
| Net earnings on class A  and class B common shares                                 |       | $        | 12,261     |     | $          | 16,900 |   |
|                                                                               |       |     |       |     |       |
| Net earnings per class  A and class B common share:                                |       |     |       |     |       |
| Basic                                                                              |       | 0.31     |       | 0.46     |       |
| Diluted                                                                            |       | 0.31     |       | 0.45     |       |
|                                                                               |       |     |       |     |       |
| Dividends per class A  and class B common share                                    |       | 0.50     |       | 0.50     |       |

 

See notes to condensed consolidated financial statements.

4

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**Orient-Express Hotels Ltd. andSubsidiaries**

**Statements of CondensedConsolidated Cash Flows (unaudited)**
| **Six months ended June 30,**                                    | ** ** | **2006**                             | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------|------------|----------|------------|
| ** **                                                                           | ** ** | **(Dollars in thousands)** | ** ** |
| Cash flows from  operating activities:                                               |       |                                 |       |     |       |
| Net earnings                                                                         |       | $                                    | 12,261     |     | $          | 16,900 |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities: |       |                                 |       |     |       |
| Depreciation and  amortization                                                       |       | 18,680                               |       | 16,450   |       |
| Undistributed  earnings of affiliates                                                |       | (2,395                               | )          | (871     | )          |
| Stock-based  compensation                                                            |       | 428                                  |       | —   |       |
| Change in  deferred tax                                                              |       | (5,716                               | )          | (815     | )          |
| Gain from sale  of investments and fixed assets                                      |       | (6,619                               | )          | (1,044   | )          |
| Other non-cash  items                                                                |       | 4,389                                |       | 17       |       |
| Change in assets  and liabilities net of effects from acquisition of subsidiaries:   |       |                                 |       |     |       |
| Increase in  receivables, prepaid expenses and other                                 |       | (8,514                               | )          | (24,846  | )          |
| Increase in  inventories                                                             |       | (2,374                               | )          | (2,572   | )          |
| Increase in real  estate assets held for sale                                        |       | (2,935                               | )          | —   |       |
| Increase in  payables, accrued liabilities and deferred revenue                      |       | 28,571                               |       | 25,013   |       |
|                                                                                 |       |                                 |       |     |       |
| Total  adjustments                                                                   |       | 23,515                               |       | 11,332   |       |
|                                                                                 |       |                                 |       |     |       |
| Net cash provided by  operating activities                                           |       | 35,776                               |       | 28,232   |       |
|                                                                                 |       |                                 |       |     |       |
| Cash flows from  investing activities:                                               |       |                                 |       |     |       |
| Capital  expenditures                                                                |       | (60,895                              | )          | (58,025  | )          |
| Acquisitions and  investments, net of cash acquired                                  |       | (20,377                              | )          | (96,075  | )          |
| Proceeds from  sale of fixed assets and other                                        |       | 9,499                                |       | 1,140    |       |
|                                                                                 |       |                                 |       |     |       |
| Net cash used in  investing activities                                               |       | (71,773                              | )          | (152,960 | )          |
|                                                                                 |       |                                 |       |     |       |
| Cash flows from  financing activities:                                               |       |                                 |       |     |       |
| Net  (repayment)/proceeds from working capital facilities and redrawable loans       |       | (508                                 | )          | (90,004  | )          |
| Issuance of  common shares                                                           |       | —                               |       | 122,934  |       |
| Stock options  exercised                                                             |       | 1,618                                |       | —   |       |
| Issuance of  long-term debt                                                          |       | 84,754                               |       | 108,409  |       |
| Principal  payments under long-term debt                                             |       | (30,926                              | )          | (20,075  | )          |
| Payment of  common share dividends                                                   |       | (1,971                               | )          | (1,839   | )          |
|                                                                                 |       |                                 |       |     |       |
| Net cash provided by  financing activities                                           |       | 52,967                               |       | 119,425  |       |
|                                                                                 |       |                                 |       |     |       |
| Effect of exchange rate  changes on cash and cash equivalents                        |       | 570                                  |       | (1,162   | )          |
|                                                                                 |       |                                 |       |     |       |
| Net increase/(decrease)  in cash and cash equivalents                                |       | 17,540                               |       | (6,465   | )          |
|                                                                                 |       |                                 |       |     |       |
| Cash and cash  equivalents at beginning of period                                    |       | 38,397                               |       | 85,610   |       |
|                                                                                 |       |                                 |       |     |       |
| Cash and cash  equivalents at end of period                                          |       | $                                    | 55,937     |     | $          | 79,145 |   |

See notes to condensed consolidated financialstatements.

5

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**Orient-ExpressHotels Ltd. and Subsidiaries**

**Statementsof Condensed Consolidated Shareholders’ Equity (unaudited)**
| **(Dollars in thousands)**          | ** ** | **Preferred  Shares  at Par  Value** | ** ** | **Class A  Common  Shares  at Par  Value** | ** ** | **Class B  Common  Shares  at Par  Value** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Common  Shares  Owned by  Subsidiary** | ** ** | **Total  Comprehensive  Income/(Loss)** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------|------------|------------------------|------------|---------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------|------------|
|                                          |       |                                      |       |                                                 |       |                                                 |       |                             |       |                   |       |                                        |       |                                          |       |                                    |       |
| Balance, January 1, 2006                      |       | $                                         | —     |                                                 | $          | 393                                                  |       | $                                | 181        |                   | $          | 404,923                                     |       | $                                             | 314,207    |                                    | $          | (46,123 | ) | $ | (181 | ) |   |   |
| Stock-based compensation                      |       | —                                    |       | —                                               |       | —                                               |       | 428                              |       | —                 |       | —                                      |       | —                                        |       |                                    |       |
| Stock options exercised                       |       | —                                    |       | —                                               |       | —                                               |       | 1,618                            |       | —                 |       | —                                      |       | —                                        |       |                                    |       |
| Dividends on common  shares                   |       | —                                    |       | —                                               |       | —                                               |       | —                           |       | (1,971                 | )          | —                                      |       | —                                        |       |                                    |       |
| Comprehensive loss:                           |       |                                      |       |                                                 |       |                                                 |       |                             |       |                   |       |                                        |       |                                          |       |                                    |       |
| Net  earnings on common shares for the period |       | —                                    |       | —                                               |       | —                                               |       | —                           |       | 12,261                 |       | —                                      |       | —                                        |       | $                                       | 12,261     |   |
| Other  comprehensive income                   |       | —                                    |       | —                                               |       | —                                               |       | —                           |       | —                 |       | 7,901                                       |       | —                                        |       | 7,901                                   |       |
|                                          |       |                                      |       |                                                 |       |                                                 |       |                             |       |                   |       |                                        |       |                                          |       | $                                       | 20,162     |   |
| Balance, June 30, 2006                        |       | $                                         | —     |                                                 | $          | 393                                                  |       | $                                | 181        |                   | $          | 406,969                                     |       | $                                             | 324,497    |                                    | $          | (38,222 | ) | $ | (181 | ) |   |   |

 

See notes to condensedconsolidated financial statements.

6

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**Orient-Express Hotels Ltd. andSubsidiaries**

**Notes to Condensed ConsolidatedFinancial Statements**

**1.****             Basisof financial statement presentation**

In this reportOrient-Express Hotels Ltd. is referred to as the “Company”, and the Company andits subsidiaries are referred to collectively as “OEH”.

*(a)**          Accountingpolicies*

For a description ofsignificant accounting policies and basis of presentation, see Notes 1 and 15to the consolidated financial statements in the Company’s 2005 Form 10-K annualreport.  As of June 30, 2006, thesesignificant accounting policies have not changed from December 31, 2005.

The condensedconsolidated financial statements are unaudited and have been preparedfollowing the rules and regulations of the U.S. Securities and ExchangeCommission.

In the opinion ofmanagement, all adjustments necessary for a fair statement of the results ofoperations for the three and six months ended June 30, 2006 and 2005, which areall of a normal recurring nature, have been reflected in the informationprovided.  Due to the seasonal nature ofOEH’s business, operating results for the interim period are not necessarilyindicative of a full year’s operating results.

*(b)**          Netearnings per share*

The number of shares used in computing basic anddiluted earnings per share was as follows (in thousands):
| **Three months ended June 30,** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|
|                                                |       |     |       |     |       |
| Basic                                               |       | 39,475   |       | 39,311   |       |
| Effect of dilution                                  |       | 383      |       | 369      |       |
| Diluted                                             |       | 39,858   |       | 39,680   |       |

 
| **Six months ended June 30,** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
|                                              |       |     |       |     |       |
| Basic                                             |       | 39,443   |       | 37,049   |       |
| Effect of dilution                                |       | 362      |       | 324      |       |
| Diluted                                           |       | 39,805   |       | 37,373   |       |

7

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For the three months ended June 30, 2006 and 2005, theanti-dilutive effect of stock options on nil and 1,127 class A common shares,respectively, was excluded from the computation of diluted losses pershare.  For the six months ended June 30,2006 and 2005, the anti-dilutive effect of stock options on nil and 5,879 classA common shares, respectively, was excluded from the computation of dilutedearnings per share.

*(c)**           Dividends*

On January 5, 2006, theCompany declared a dividend of $0.025 per common share payable February 4, 2006to shareholders of record January 20, 2006. On April 5, 2006, the Companydeclared a dividend of $0.025 per common share payable May 4, 2006 toshareholders of record April 20, 2006.

*(d)**          Earningsfrom unconsolidated companies*

Earnings fromunconsolidated companies include OEH’s share of the net earnings of its equityinvestments as well as interest income related to loans and advances to theequity investees amounting to $2,752,000 and $2,480,000 for the three monthsended June 30, 2006 and 2005, respectively, and $5,094,000 and $4,668,000 forthe six months ended June 30, 2006 and 2005, respectively.   

*(e)**           Reclassifications*

Certain items in 2005have been reclassified to conform to the 2006 presentation.

**2.****             Acquisitions**

*Casa de Sierra Nevada*

Effective February 8, 2006,OEH acquired a 75% interest in Casa de Sierra Nevada, a 33 room deluxe hotel inSan Miguel de Allende, Mexico.  The totalpurchase price, including acquisition costs, was $8,800,000 paid in cash.  The acquisition included adjacent buildingsand land.  

In accordance with theshareholders’ agreement, OEH will purchase the remaining 25% interest asfollows:  5% will be purchased in January2007 for a cash consideration of $520,000; 5% will be purchased in January 2009for a cash consideration equal to a proportion of ten times the previous 12months net operating income of the hotel, less its outstanding debt; and theremaining 15% will be purchased in January 2010 for a cash considerationcalculated on the same basis.

The following tablesummarizes the estimated fair values of the assets acquired and liabilitiesassumed at the date of acquisition. (dollars in thousands):

8

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| ** **                                            | ** ** | **June 30, 2006** | ** ** |
|-------------------------------------------------------|------------|-----------------------------|------------|
|                                                  |       |                        |       |
| Property, plant  and equipment                        |       | $                           | 8,600      |   |
| Goodwill and  other intangible assets                 |       | 3,770                       |       |
| Total assets  acquired                                |       | 12,370                      |       |
|                                                  |       |                        |       |
| Current  liabilities                                  |       | (200                        | )          |
| Other long-term  liabilities (deferred consideration) |       | (2,850                      | )          |
| Deferred income  taxes                                |       | (520                        | )          |
| Total  liabilities assumed                            |       | (3,570                      | )          |
| Net assets acquired                                   |       | $                           | 8,800      |   |

 

The net assets of Casa deSierra Nevada have been fair valued based on the estimated replacement cost ofthe buildings.  After fair valuing allother assets and liabilities, goodwill of $3,510,000 has been recorded of which$ nil will be deductible as operating expenses for tax purposes.

The acquisition of Casade Sierra Nevada has been accounted for as a purchase in accordance with SFASNo. 141, “Business Combinations”.  Theresults of the operation have been included in the consolidated financialstatements of OEH from February 8, 2006.

Guidance in SFAS No. 150,“Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity”, and EITF 00-4, “Majority owner’s accounting for atransaction in the shares of a consolidated subsidiary and a derivative indexedto the minority interest in that subsidiary”, has been applied to account forthe forward contracts for acquisition of the remaining 25% interest insubsequent years.  The liability has beenrecorded at the fair value of the deferred consideration and the minorityinterest has been reduced accordingly.

The provisional fairvalues may be adjusted within one year of the acquisition date of Casa deSierra Nevada as the valuation of certain forward contracts remains to befinalized.

The proforma results ofoperations data presented below assume that the Casa de Sierra Nevadaacquisition had been made at the beginning of 2005.  The proforma data are presented forinformational purposes only and are not necessarily indicative of the resultsof future operations nor of the actual results that would have been achievedhad the acquisition taken place at the beginning of 2005 (dollars inthousands):

9

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| **Six months ended June 30,** | ** ** | **2006**                      | ** ** | **2005** | ** ** |
|---------------------------------------------------|------------|-------------------------------|------------|----------|------------|
| ** **                                        | ** ** | **(Proforma unaudited)** | ** ** |
| Revenue                                           |       | $                             | 214,179    |     | $          | 207,902 |   |
| Net earnings                                      |       | $                             | 12,269     |     | $          | 16,860 |   |
| Earnings per share:                               |       |                          |       |     |       |
| Basic                                             |       | $                             | 0.31       |     | $          | 0.46 |   |
| Diluted                                           |       | $                             | 0.31       |     | $          | 0.45 |   |

 

*Maroma Resort and Spa*

Effective January 1, 2006,OEH purchased the remaining 25% interest in Maroma Resort and Spa for a cashconsideration of $5,400,000 bringing its interest to 100%.  A deferred tax liability of $1,853,000 hasbeen recorded on the acquisition. Goodwill of $4,728,000 has been recognized on this acquisition.

**3.****                                     ****Investments**

*Acquisition of Pansea Hotels - Napasai*

On February 2, 2004, OEH entered into an agreementwith the Pansea Hotels group, the owner of interests in six deluxe hotels inSoutheast Asia, including 50% of the Napasai hotel in Koh Samui, Thailand.  Under this agreement, OEH was to provide amaximum of $8,000,000 in loans to the hotel holding company which would beconvertible after three years into approximately 25% of the holding company’sshares.  As of June 30, 2006, OEH hadprovided $8,000,000 (December 31, 2005-$8,000,000) in loans to Pansea which arerecorded in other assets.  The conversionprice of the loans would be determined at a multiple of EBITDA less existingdebt on the exercise date (as defined in the investment agreement).  OEH was not managing the hotels but wasmarketing them along with its other properties.

OEH has decided to accelerate the acquisition of thePansea Hotels group by acquiring the 50% of the Napasai hotel-owning companyshares not owned by Pansea in June 2006 for $10,500,000 cashconsideration.  The rest of the PanseaHotels group has been acquired in July 2006 for a total cash consideration of$41,750,000, which included cash transfers, and before sundry debts owed by thePansea Hotels group to third parties and any working capital adjustments.

*Sale of Harry’s Bar*

On June 12, 2006, OEH sold its 49% interest in Harry’sBar in London, England for a cash consideration of $9,499,000.  The sale of the

10

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investment resulted in a gain of $6,619,000, uponwhich a tax charge of $3,325,000 was recorded.

*Unconsolidated companies*

Summarized financial data for OEH’s unconsolidatedcompanies for the periods during which the investments were held by OEH are asfollows (dollars in thousands):
| ** **                                       | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Current assets                                   |       | $                       | 48,868     |                        | $          | 45,390 |   |
| Property, plant  and equipment, net              |       | 356,171                 |       | 344,475                     |       |
| Other assets                                     |       | 6,555                   |       | 5,726                       |       |
| Total assets                                     |       | $                       | 411,594    |                        | $          | 395,591 |   |
|                                             |       |                    |       |                        |       |
| Current  liabilities                             |       | $                       | 49,860     |                        | $          | 50,150 |   |
| Long-term debt                                   |       | 231,464                 |       | 203,520                     |       |
| Other  liabilities                               |       | 78,518                  |       | 90,161                      |       |
| Total  shareholders’ equity                 |       | 51,752                  |       | 51,760                      |       |
| Total liabilities and  shareholders’ equity |       | $                       | 411,594    |                        | $          | 395,591 |   |

 
| **Three months ended June 30,** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|
|                                                |       |     |       |     |       |
| Revenue                                             |       | $        | 46,519     |     | $          | 43,500 |   |
| Earnings from  operations before net finance costs  |       | $        | 8,535      |     | $          | 6,930 |   |
| Net earnings                                        |       | $        | 50         |     | $          | 448 |   |

 
| **Six months ended June 30,**  | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|
|                                               |       |     |       |     |       |
| Revenue                                            |       | $        | 83,577     |     | $          | 77,314 |   |
| Earnings from  operations before net finance costs |       | $        | 12,463     |     | $          | 9,250 |   |
| Net losses                                         |       | $        | (3,088     | )        | $          | (2,783 | ) |

 

11

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**4. Property, plant and equipment**

The major classesof property, plant and equipment are as follows (dollars in thousands):

 
| ** **                               | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Freehold and  leased land and buildings  |       | $                       | 919,698    |                        | $          | 858,350 |   |
| Machinery and  equipment                 |       | 179,160                 |       | 156,780                     |       |
| Fixtures,  fittings and office equipment |       | 162,696                 |       | 148,346                     |       |
| River cruiseship  and canalboats         |       | 18,624                  |       | 18,513                      |       |
|                                     |       | 1,280,178               |       | 1,181,989                   |       |
| Less:  accumulated depreciation          |       | (185,526                | )          | (164,814                    | )          |
|                                     |       | $                       | 1,094,652  |                        | $          | 1,017,175 |   |

 

Themajor classes of assets under capital leases included above are as follows(dollars in thousands):

 
| ** **                               | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Land and  buildings                      |       | $                       | 15,652     |                        | $          | 14,803 |   |
| Machinery and  equipment                 |       | 2,383                   |       | 2,067                       |       |
| Fixtures,  fittings and office equipment |       | 1,753                   |       | 1,817                       |       |
|                                     |       | 19,788                  |       | 18,687                      |       |
| Less:  accumulated depreciation          |       | (2,174                  | )          | (1,892                      | )          |
|                                     |       | $                       | 17,614     |                        | $          | 16,795 |   |

 

**5.  Goodwill and other intangible assets**

OEH’s goodwillconsists of $780,000 related to the trains and cruises reporting segment and$66,131,000 related to the hotels and restaurants reporting segment, of which$28,812,000 relates to the acquisition of the Grand Hotel Europe, $3,510,000relates to the estimated purchase price allocation of Casa de Sierra Nevada,and $6,822,000 relates to goodwill arising on the acquisition of Maroma.  Other intangible assets consist of the valueof the Grand Hotel Europe tradename of $7,100,000 and the estimated purchaseprice allocation of $260,000 for the Casa de Sierra Nevada tradename.

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**6.  Long-term debt and obligations under capitallease**

Long-termdebt consists of the following (dollars in thousands):

 
| ** **                                                                                                                                                                                                        | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|  Loans from banks collateralized by property,  plant and equipment payable over periods of 1 to 11 years, with a weighted  average interest rate of 5.81% and 5.51%, respectively, primarily based on  LIBOR |       | $                       | 627,980    |                        | $          | 546,593 |   |
| Loan secured by  river cruiseship, payable over 3 years, with a weighted interest rate of  6.54% and 5.65% respectively, based on LIBOR                                                                           |       | 4,000                   |       | 4,500                       |       |
| Obligations  under capital lease                                                                                                                                                                                  |       | 17,314                  |       | 17,214                      |       |
|                                                                                                                                                                                                              |       | 649,294                 |       | 568,307                     |       |
| Less: current  portion                                                                                                                                                                                            |       | 82,353                  |       | 72,151                      |       |
|                                                                                                                                                                                                              |       | $                       | 566,941    |                        | $          | 496,156 |   |

 

Certain credit agreements of OEH have restrictivecovenants.  At June 30, 2006, OEH was incompliance with these covenants, including a minimum consolidated net worthtest and a minimum consolidated interest coverage test as defined under abank-syndicated $179,000,000 loan facility secured by three of OEH’s Italianhotels. OEH does not currently have any covenants in its loan agreements whichlimit the payment of dividends.

The following is a summary of the aggregate maturitiesof long-term debt, including obligations under capital lease, at June 30, 2006(dollars in thousands):
| **Year ending December 31,** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|
|                                        |       |       |       |
| 2007                                        |       | $          | 79,071     |   |
| 2008                                        |       | 245,658    |       |
| 2009                                        |       | 69,944     |       |
| 2010                                        |       | 64,077     |       |
| 2011 and thereafter                         |       | 108,191    |       |
|                                        |       | $          | 566,941    |   |

 

The interest rates on substantially all of OEH’slong-term debt are adjusted regularly to reflect current market rates.  Accordingly, the carrying amounts of OEH’slong-term debt also approximate fair value.

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**7.****                                  ****Income taxes**

Incometaxes provided by OEH relate principally to its foreign subsidiaries as pre-taxincome is primarily foreign.  Theprovision for income taxes consisted of the following (dollars in thousands):
| **Three months ended June 30,** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|
| Current                                             |       | $        | 5,179      |     | $          | 2,065 |   |
| Deferred                                            |       | (2,012   | )          | 1,355    |       |
| Total                                               |       | $        | 3,167      |     | $          | 3,420 |   |

 
| **Six months ended June 30,** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
| Current                                           |       | $        | 7,449      |     | $          | 3,938 |   |
| Deferred                                          |       | (6,246   | )          | (816     | )          |
| Total                                             |       | $        | 1,203      |     | $          | 3,122 |   |

 

The Company is incorporated in Bermuda, which does notimpose an income tax.  OEH’s effectivetax rate is entirely due to the income taxes imposed by jurisdictions in whichOEH conducts business other than Bermuda.

Deferred income taxes reflect the net tax effects oftemporary differences between the carrying amount of assets and liabilities forfinancial reporting purposes and the amounts used for income tax purposes.  The following represents OEH’s net deferredtax liabilities (dollars in thousands):

 
| ** **                    | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                          |       |                    |       |                        |       |
| Gross deferred  tax assets    |       | $                       | 62,894     |                        | $          | 60,177 |   |
| Less: Valuation  allowance    |       | (19,487                 | )          | (22,487                     | )          |
| Net deferred tax  assets      |       | 43,407                  |       | 37,690                      |       |
| Deferred tax  liabilities     |       | (55,992                 | )          | (53,007                     | )          |
| Net deferred tax  liabilities |       | $                       | (12,585    | )                           | $          | (15,317 | ) |

 

The deferred tax assets consist of tax loss carryforwards.   A valuation allowance hasbeen provided against gross deferred tax assets where it is thought more likelythan not that the benefits associated with these assets will not berealized.  A valuation allowanceestablished in respect of tax loss carry forwards at Bora Bora Lagoon Resortwas reduced by $3,000,000 in the quarter ended June 30, 2006, as OEH determinedthat it was more likely than not that these tax losses would be utilized in thefuture.

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The deferred tax liabilities consist primarily ofdifferences between the tax basis of depreciable assets and the adjusted basisreflected in the financial statements.

**8.****                                     ****Pensions**

Components of net periodic pension benefit cost were as follows(dollars in thousands):

 
| **Three months ended June 30,** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|
| Service cost                                        |       | $        | 284        |     | $          | 225 |   |
| Interest cost                                       |       | 229      |       | 179      |       |
| Expected return  on plan assets                     |       | (214     | )          | (133     | )          |
| Amortization of  net loss                           |       | 125      |       | 63       |       |
| Net periodic benefit  cost                          |       | $        | 424        |     | $          | 334 |   |

 
| **Six months ended June 30,** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
| Service cost                                      |       | $        | 547        |     | $          | 454 |   |
| Interest cost                                     |       | 442      |       | 360      |       |
| Expected return  on plan assets                   |       | (412     | )          | (271     | )          |
| Amortization of  net loss                         |       | 240      |       | 129      |       |
| Net periodic benefit  cost                        |       | $        | 817        |     | $          | 672 |   |

 

As reported in Note 7 tothe financial statements in the Company’s 2005 Form 10-K annual report, OEHexpected to contribute $894,000 to its pension plans in 2006.  As of June 30, 2006, $401,000 ofcontributions had been made.  OEHanticipates contributing an additional $493,000 to fund its pension plans in2006 for a total of $894,000.

**9.****                                     ****Supplemental cash flow information**

(Dollars in thousands):

 
| **Six months ended June 30,** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
|                                              |       |     |       |     |       |
| Cash paid for:                                    |       |     |       |     |       |
| Interest                                          |       | $        | 20,762     |     | $          | 12,501 |   |
| Income taxes                                      |       | $        | 4,819      |     | $          | 4,901 |   |

 

In conjunction with acquisitions (see Note 2)liabilities were assumed as follows (dollars in thousands):

15

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| **Six months ended June 30,** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
|                                              |       |     |       |     |       |
| Fair value of  assets acquired                    |       | $        | 19,088     |     | $          | 111,492 |   |
| Cash paid                                         |       | (14,200  | )          | (95,000  | )          |
| Liabilities assumed                               |       | $        | 4,888      |     | $          | 16,492 |   |

 

**10.****                              ****Accumulated other comprehensive loss**

The accumulated balances for each component of other comprehensiveloss are as follows (dollars in thousands):

 
| ** **                                | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Foreign currency  translation adjustments |       | $                       | (38,222    | )                           | $          | (46,055 | ) |
| Derivative  financial instruments         |       | —                  |       | (68                         | )          |
|                                      |       | $                       | (38,222    | )                           | $          | (46,123 | ) |

 

Thecomponents of comprehensive earnings/(loss) are as follows (dollars inthousands):

 
| **Six months ended June 30,** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
|                                              |       |     |       |     |       |
| Net earnings on  common shares                    |       | $        | 12,261     |     | $          | 16,900 |   |
| Foreign currency  translation adjustments         |       | 7,833    |       | (27,553  | )          |
| Change in fair  value of derivatives              |       | 68       |       | 16       |       |
| Comprehensive  earnings/(loss)                    |       | $        | 20,162     |     | $          | (10,637 | ) |

 

**11.****                              ****Commitments**

Outstanding contracts to purchase fixed assets wereapproximately $14,446,000 at June 30, 2006 (December 31, 2005 - $24,341,000). 

**12.****                           ****Information concerning financial reporting forsegments and operations in different geographical areas**

As reported in the Company’s 2005 Form 10-K annualreport, OEH has two reporting segments, (i) hotels and restaurants and (ii)tourist trains and cruises.  Segmentperformance is evaluated based upon segment net earnings before interest, tax(including tax on earnings from unconsolidated companies), depreciation andamortization (“segment EBITDA”). Financial information regarding these business segments is as follows,with net finance costs appearing net of capitalized interest and interest andrelated income (dollars in thousands):

16

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| **Three months ended June 30,**                                  | ** **                 | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------|----------------------------|----------|------------|----------|------------|
| Revenue:                                                         |                       |     |       |     |       |
| Hotels and restaurants                                           |                       |     |       |     |       |
| Owned hotels                                                     | –  Europe        |     | $          | 61,192   |       | $ | 54,688 |   |
|                                                             | –  North America |     | 22,981     |     | 23,439     |   |
|                                                             | –  Rest of world |     | 22,383     |     | 20,229     |   |
| Hotel management/part  ownership interests                       |                       | 2,786    |       | 2,599    |       |
| Restaurants                                                      |                       | 5,520    |       | 5,800    |       |
|                                                             |                       | 114,862  |       | 106,755  |       |
| Tourist trains and cruises                                       |                       | 19,843   |       | 19,497   |       |
|                                                             |                       | $        | 134,705    |     | $          | 126,252 |   |
|                                                             |                       |     |       |     |       |
| Segment EBITDA:                                                  |                       |     |       |     |       |
| Owned hotels                                                     | –  Europe        |     | $          | 24,268   |       | $ | 21,082 |   |
|                                                             | –  North America |     | 5,494      |     | 5,336      |   |
|                                                             | –  Rest of world |     | 3,564      |     | 2,944      |   |
| Hotel management/part  ownership interests .                     |                       | 6,274    |       | 5,687    |       |
| Restaurants                                                      |                       | 1,491    |       | 1,638    |       |
| Tourist trains and  cruises                                      |                       | 5,362    |       | 5,166    |       |
| Central overheads                                                |                       | (5,355   | )          | (4,654   | )          |
| Gain on sale of  investment                                      |                       | 6,619    |       | —   |       |
|                                                             |                       | $        | 47,717     |     | $          | 37,199 |   |
|                                                             |                       |     |       |     |       |
| Segment EBITDA/net earnings reconciliation:                      |                       |     |       |     |       |
| Segment EBITDA                                                   |                       | $        | 47,717     |     | $          | 37,199 |   |
| Less:                                                            |                       |     |       |     |       |
| Depreciation and  amortization                                   |                       | 9,296    |       | 8,632    |       |
| Interest expense, net                                            |                       | 9,981    |       | 6,726    |       |
| Foreign currency, net                                            |                       | 3,478    |       | (495     | )          |
| Provision for income  taxes                                      |                       | 3,167    |       | 3,420    |       |
| Share of provision for  income taxes of unconsolidated companies |                       | 1,923    |       | 459      |       |
| Net earnings                                                     |                       | $        | 19,872     |     | $          | 18,457 |   |

 

Financialinformation regarding geographic areas based on the location of properties isas follows (dollars in thousands):

 
| **Three months ended June 30,** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|
|                                                |       |     |       |     |       |
| Revenue:                                            |       | $        | 80,490     |     | $          | 73,930 |   |
| Europe                                              |       | 29,778   |       | 30,356   |       |
| North America                                       |       | 24,437   |       | 21,966   |       |
| Rest of world                                       |       | $        | 134,705    |     | $          | 126,252 |   |

 

17

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| **Six months ended June 30,**                | ** **                  | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------|-----------------------------|----------|------------|----------|------------|
| Revenue:                                                         |                        |     |       |     |       |
| Hotels and  restaurants                                          |                        |     |       |     |       |
| Owned hotels                                                     | –  Europe         |     | $          | 73,577   |       | $ | 71,475 |   |
|                                                             | –  North  America |     | 45,886     |     | 46,932     |   |
|                                                             | –  Rest of  world |     | 52,211     |     | 45,430     |   |
| Hotel management/part ownership interests                        |                        | 4,771    |       | 4,418    |       |
| Restaurants                                                      |                        | 10,839   |       | 10,989   |       |
|                                                             |                        | 187,284  |       | 179,244  |       |
| Tourist trains  and cruises                                      |                        | 26,672   |       | 27,497   |       |
|                                                             |                        | $        | 213,956    |     | $          | 206,741 |   |
|                                                             |                        |     |       |     |       |
| Depreciation and  amortization:                                  |                        |     |       |     |       |
| Hotels and  restaurants                                          |                        |     |       |     |       |
| Owned hotels                                                     | –  Europe         |     | $          | 7,947    |       | $ | 6,297 |   |
|                                                             | –  North  America |     | 3,848      |     | 3,543      |   |
|                                                             | –  Rest of  world |     | 4,634      |     | 4,320      |   |
| Restaurants                                                      |                        | 446      |       | 437      |       |
|                                                             |                        | 16,875   |       | 14,597   |       |
| Tourist trains  and cruises                                      |                        | 1,805    |       | 1,853    |       |
|                                                             |                        | $        | 18,680     |     | $          | 16,450 |   |
|                                                             |                        |     |       |     |       |
| Segment EBITDA:                                                  |                        |     |       |     |       |
| Owned hotels                                                     | –  Europe         |     | $          | 17,101   |       | $ | 17,958 |   |
|                                                             | –  North  America |     | 11,515     |     | 11,494     |   |
|                                                             | –  Rest of  world |     | 13,141     |     | 10,038     |   |
| Hotel management/part ownership interests                        |                        | 9,644    |       | 8,614    |       |
| Restaurants                                                      |                        | 2,589    |       | 2,650    |       |
| Tourist trains and cruises                                       |                        | 5,528    |       | 5,058    |       |
| Central overheads                                                |                        | (9,887   | )          | (9,151   | )          |
| Gain on sale of investment                                       |                        | 6,619    |       | —   |       |
|                                                             |                        | $        | 56,250     |     | $          | 46,661 |   |
|                                                             |                        |     |       |     |       |
| Segment  EBITDA/net earnings reconciliation:                     |                        |     |       |     |       |
| Segment EBITDA                                                   |                        | $        | 56,250     |     | $          | 46,661 |   |
| Less:                                                            |                        |     |       |     |       |
| Depreciation and amortization                                    |                        | 18,680   |       | 16,450   |       |
| Interest expense, net                                            |                        | 18,973   |       | 13,805   |       |
| Foreign currency, net                                            |                        | 2,796    |       | (4,075   | )          |
| Provision for income taxes                                       |                        | 1,203    |       | 3,122    |       |
| Share of provision for income taxes of unconsolidated  companies |                        | 2,337    |       | 459      |       |
| Net earnings                                                     |                        | $        | 12,261     |     | $          | 16,900 |   |
|                                                             |                        |     |       |     |       |
| Earnings from  unconsolidated companies, net of tax:             |                        |     |       |     |       |
| Hotels and restaurants                                           |                        |     |       |     |       |
| Hotel management/part ownership interests                        |                        | $        | 3,352      |     | $          | 4,071 |   |
| Restaurants                                                      |                        | 191      |       | 157      |       |
|                                                             |                        | 3,543    |       | 4,228    |       |
| Tourist trains and cruises                                       |                        | 1,609    |       | 1,311    |       |
|                                                             |                        | $        | 5,152      |     | $          | 5,539 |   |

 

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| **Six months ended June 30,** | ** **                 | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------|----------------------------|----------|------------|----------|------------|
|                                              |                       |     |       |     |       |
| Capital  expenditure:                             |                       |     |       |     |       |
| Owned hotels                                      | –  Europe        |     | $          | 33,751   |       | $ | 35,891 |   |
|                                              | –  North America |     | 14,270     |     | 11,686     |   |
|                                              | –  Rest of world |     | 6,431      |     | 7,061      |   |
| Hotel management/part ownership interests         |                       | —   |       | —   |       |
| Restaurants                                       |                       | 194      |       | 462      |       |
| Tourist trains and cruises                        |                       | 6,249    |       | 2,925    |       |
|                                              |                       | $        | 60,895     |     | $          | 58,025 |   |

 

Financialinformation regarding geographic areas based on the location of properties isas follows (dollars in thousands):

 
| **Six months ended June 30,** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
|                                              |       |     |       |     |       |
| Revenue:                                          |       |     |       |     |       |
| Europe                                            |       | $        | 97,644     |     | $          | 96,672 |   |
| North America                                     |       | 58,529   |       | 59,502   |       |
| Rest of world                                     |       | 57,783   |       | 50,567   |       |
|                                              |       | $        | 213,956    |     | $          | 206,741 |   |

 

**13.  Relatedparty transactions**

For the three months ended June 30, 2005, OEH paidsubsidiaries of Sea Containers Ltd (“SCL”) $1,523,000 for the provision ofvarious services under a services agreement between OEH and SCL.  For the six months ended June 30, 2005, OEHpaid subsidiaries of SCL $2,979,000 under this agreement.  These amounts have been settled in accordancewith the services agreement and are included in selling, general andadministrative expenses.  As of June 30,2006, SCL is no longer a related party of OEH.

OEH guarantees a $3,000,000 bank loan to Eastern andOriental Express Ltd. in which OEH has a minority shareholder interest.  This guarantee was in place before December31, 2002.

OEH manages under along-term contract the Charleston Place Hotel (accounted for under the equitymethod) and has made loans to the hotel-owning company.  For the three months ended June 30, 2006, OEHearned $1,563,000 (2005 - $1,520,000) in management fees which are recorded inrevenue, and $2,752,000 (2005 - $2,480,000) in interest income on partnershipand other loans, which are recorded in earnings from unconsolidatedcompanies.  For the six months ended June30, 2006, OEH earned $2,637,000 (2005 - $2,456,000) in management fees, and$5,094,000 (2005 - $4,668,000) in interest income on partnership and otherloans.

19

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OEH manages underlong-term contracts the Hotel Monasterio and the Machu Picchu Sanctuary Lodgeowned by its 50/50 joint venture with local Peruvian interests, as well as the50/50-owned PeruRail operation, and provides loans, guarantees and other creditaccommodation to these joint ventures. In the three months ended June 30, 2006, OEH earned management andguarantee fees of $1,346,000 (2005 - $1,174,000) and loan interest of $24,000(2005 - $29,000) which are recorded in revenue. In the six months ended June 30, 2006, OEH earned management andguarantee fees of $2,420,000 (2005 - $2,068,000) and loan interest of $56,000(2005 - $58,000).  At June 30, 2006, OEHhad a $750,000 subordinated loan to the PeruRail operation with an indefinitematurity date and interest at a spread over LIBOR.  All of the guarantees relating to the Company’sinvestments in Peru were in place prior to December 31, 2002.

OEH manages under along-term contract the Hotel Ritz in Madrid, Spain, in which OEH owns a 50%interest and is accounted for under the equity method.  For the three months ended June 30, 2006, OEHearned $364,000 (2005 - $328,000) in management fees, which are included inrevenue.  For the six months ended June30, 2006, OEH earned $610,000 (2005 - $569,000) in management fees.

**14. Subsequent events**

*Pansea Hotels group acquisition*

On July 6, 2006, OEHannounced the acquisition of the Pansea Hotels group.  See Note 3.

*OEH share offering*

On July 10, 2006, theCompany entered into an underwriting agreement with Citigroup Global MarketsInc. as underwriter relating to the sale by the Company of 2,500,000newly-issued class A common shares in an underwritten public offering pursuantto the Company’s registration statement on Form S-3, registration No.333-135673.  Citigroup purchased theclass A shares from the Company at a price per share of $39.76 (approximately$99,220,000 aggregate proceeds to the Company after deducting estimatedoffering expenses) for resale in the offering.

# *European hotel refinancing*

# On July 20, 2006, OEH entered into two related securedloan facilities for a total amount of €250,000,000 including an Italian securedterm loan facility in the amount of €190,000,000 with Banca Nazionale delLavoro S.P.A. as lender,

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# and an English secured multicurrency revolving creditfacility in the amount of €60,000,000 with Barclays Bank PLC and six otherbanks as lenders.

# Under the facilities, borrowings may be drawn ineuros, pounds sterling, U.S. dollars and any other currency freely tradable inthe London banking market.  The interestrate is LIBOR/EURIBOR plus 0.9% per annum. The facility agreements include customary representations, warranties,and covenants, including (i) a minimum tangible net worth covenant requiringOEH to maintain a consolidated tangible net worth of not less than$450,000,000, (ii) a loan to value covenant pursuant to which, at any time, theaggregate amount outstanding under the facilities will not exceed 70% of theaggregate value of the hotels securing the facilities, as shown in the mostrecently delivered valuations, and (iii) interest coverage ratios.

The Italian loan facilityis secured by the Hotel Cipriani, Villa San Michele, Hotel Splendido, HotelCaruso, Reids Palace Hotel, Lapa Palace Hotel, and Le Manoir aux Quat’Saisons.  The English facility is secured by ReidsPalace Hotel, Lapa Palace Hotel, and Le Manoir aux Quat’Saisons.  Loans under the two facilities will be usedfor general corporate purposes and to refinance existing loan facilitiessecured by the hotels.

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**ITEM 2.****                          Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

**Results of Operations**

Three months ended June30, 2006 compared toThree months ended June 30, 2005

OEH’s operating results for the three months endedJune 30, 2006 and 2005, expressed as a percentage of revenue, were as follows:
| ** **                                     | ** ** | **Three months  ended June 30** | ** ** |
|------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                     | ** ** | **2006**                                       | ** ** | **2005** | ** ** |
| ** **                                     | ** ** | **%**                                          | ** ** | **%** | ** ** |
| Revenue:                                       |       |                                           |       |   |   |
| Hotels and restaurants                         |       | 85                                             |       | 84 |   |
| Tourist trains and cruises                     |       | 15                                             |       | 16 |   |
|                                           |       | 100                                            |       | 100 |   |
| Expenses:                                      |       |                                           |       |   |   |
| Depreciation and amortization                  |       | 7                                              |       | 6 |   |
| Operating                                      |       | 46                                             |       | 46 |   |
| Selling, general and administrative            |       | 27                                             |       | 28 |   |
| Gain on sale of  investment                    |       | (5                                             | )          | — |   |
| Net finance  costs                             |       | 10                                             |       | 5 |   |
| Profit before  income taxes                    |       | 15                                             |       | 15 |   |
| Benefit from  (provision for) income taxes     |       | (2                                             | )          | (3 | ) |
| Earnings from  unconsolidated companies        |       | 2                                              |       | 3 |   |
| Net earnings as a  percentage of total revenue |       | 15                                             |       | 15 |   |

 

Segment net earnings before interest, tax (includingtax on unconsolidated companies), depreciation and amortization (“segmentEBITDA”) of OEH’s operations for the three months ended June 30, 2006 and 2005are analyzed as follows (dollars in millions):
| ** **                  | ** ** | **Three months ended  June 30** | ** ** |
|-----------------------------|------------|------------------------------------------------|------------|
| ** **                  | ** ** | **2006**                                       | ** ** | **2005** | ** ** |
| Segment EBITDA:             |       |                                           |       |   |   |
| Owned hotels:               |       |                                           |       |   |   |
| Europe                      |       | $                                              | 24.3       |   | $ | 21.1 |   |
| North America               |       | 5.5                                            |       | 5.3 |   |
| Rest of the world           |       | 3.6                                            |       | 2.9 |   |
| Hotel management  interests |       | 6.3                                            |       | 5.7 |   |
| Restaurants                 |       | 1.5                                            |       | 1.6 |   |
| Tourist trains  and cruises |       | 5.3                                            |       | 5.2 |   |
| Central  overheads          |       | (5.4                                           | )          | (4.6 | ) |
| Gain on sale of  investment |       | 6.6                                            |       | — |   |
| Total segment EBITDA        |       | $                                              | 47.7       |   | $ | 37.2 |   |

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The foregoing segmentEBITDA reconciles to net earnings as follows (dollars in millions):
| ** **                                                       | ** ** | **Three months ended  June 30** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                       | ** ** | **2006**                                       | ** ** | **2005** | ** ** |
| Net earnings                                                     |       | $                                              | 19.9       |   | $ | 18.5 |   |
| Add:                                                             |       |                                           |       |   |   |
| Depreciation and amortization                                    |       | 9.3                                            |       | 8.6 |   |
| Interest  expense, net                                           |       | 10.0                                           |       | 5.7 |   |
| Foreign  currency, net                                           |       | 3.5                                            |       | 0.5 |   |
| Provision for  income taxes                                      |       | 3.1                                            |       | 3.4 |   |
| Share of  provision for income taxes of unconsolidated companies |       | 1.9                                            |       | 0.5 |   |
| Segment EBITDA                                                   |       | $                                              | 47.7       |   | $ | 37.2 |   |

 

Management evaluates theoperating performance of OEH’s segments on the basis of segment EBITDA andbelieves that segment EBITDA is a useful measure of operating performancebecause segment EBITDA is not affected by non-operating factors such asleverage and the historic cost of assets. EBITDA is a financial measure commonly used in OEH’s industry.  OEH’s segment EBITDA, however, may not becomparable in all instances to EBITDA as disclosed by other companies.  Segment EBITDA should not be considered as analternative to earnings from operations or net earnings (as determined inaccordance with U.S. generally accepted accounting principles) as a measure ofOEH’s operating performance, or as an alternative to net cash provided byoperating, investing and financing activities (as determined in accordance withU.S. generally accepted accounting principles) as a measure of OEH’s ability tomeet cash needs.

Operating information for OEH’s owned hotels for thethree months ended June 30, 2006 and 2005 is as follows:

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|                                  | ** ** | **Three months  ended  June 30** | ** ** |
|----------------------------------|------------|--------------------------------------------|------------|
| ** **                       | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
|                             |       |                                       |       |   |   |
| Average Daily  Rate (in dollars) |       |                                       |       |   |   |
| Europe                           |       | 627                                        |       | 582 |   |
| North America                    |       | 320                                        |       | 315 |   |
| Rest of the world                |       | 248                                        |       | 239 |   |
| Worldwide                        |       | 417                                        |       | 395 |   |
|                             |       |                                       |       |   |   |
| Rooms Sold (in  thousands)       |       |                                       |       |   |   |
| Europe                           |       | 57                                         |       | 55 |   |
| North America                    |       | 39                                         |       | 43 |   |
| Rest of the world                |       | 49                                         |       | 45 |   |
| Worldwide                        |       | 145                                        |       | 143 |   |
|                             |       |                                       |       |   |   |
| RevPAR (in dollars)              |       |                                       |       |   |   |
| Europe                           |       | 413                                        |       | 373 |   |
| North America                    |       | 228                                        |       | 224 |   |
| Rest of the world                |       | 146                                        |       | 129 |   |
| Worldwide                        |       | 269                                        |       | 246 |   |

 
| ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | **Change%** | ** ** |
|---------------------------------|------------|------------|------------|------------|------------|-------------|------------|
| ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | **Dollars** | ** ** | **Local  Currency** | ** ** |
| Same Store  RevPAR (in dollars) |       |       |       |       |       |        |       |   |   |
| Europe                          |       | 397        |       | 382        |       | 4           | %          | 7 | % |
| North America                   |       | 303        |       | 267        |       | 13          | %          | 13 | % |
| Rest of the world               |       | 145        |       | 129        |       | 12          | %          | 16 | % |
| Worldwide                       |       | 269        |       | 252        |       | 7           | %          | 10 | % |

 

Average daily rate is the average amount achieved forthe rooms sold.  RevPAR is revenue peravailable room, that is the rooms revenue divided by the number of availablerooms for each night of operation.  Samestore RevPAR is a comparison based on the operations of the same units in eachperiod, such as by excluding the effect of any acquisitions or majorrefurbishments.

*Overview*

The net earnings for the period were $19.9 million($0.50 per common share) on revenue of $134.7 million, compared with netearnings of $18.5 million ($0.47 per common share) on revenue of $126.3 millionin the prior year second quarter.

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*Revenue*

Total revenue increased by $8.5 million, or 7%, from$126.3 million in the three months ended June 30, 2005 to $134.7 million in thethree months ended June 30, 2006.  Hotelsand restaurants revenue increased by $8.1 million, or 8%, from $106.8 millionin the three months ended June 30, 2005 to $114.9 million in the three monthsended June 30, 2006, and tourist trains and cruises increased by $0.3 million,or 2%, from $19.5 million for the three months ended June 30, 2005 to $19.8million for the three months ended June 30, 2006.

The increase in total revenue was due primarily to theperformance of the hotels portfolio, in particular the European propertieswhich showed an increase in revenue of $6.5 million.  The strong performance of the Rest of theWorld properties contributed a further $2.1 million.

The revenue from restaurants decreased by $0.3million, or 5%, from $5.8 million in the three months ended June 30, 2005 to$5.5 million in the three months ended June 30, 2006.  The decrease was due to the impact of thesale of Harry’s Bar.

For owned hotels overall, same store RevPAR in U.S.dollars increased by 7% in the three months ended June 30, 2006 compared to thethree months ended June 30, 2005. Measured in local currencies this increase was 10%, of which 3% relatesto higher achieved average daily rates.

The change in revenue at owned hotels is analyzed on aregional basis as follows:

*Europe*.  Revenue increased by $6.5 million, or 12%,from $54.7 million for the three months ended June 30, 2005 to $61.2 millionfor the three months ended June 30, 2006. The impact of the Hotel Caruso, opened in July 2005, resulted in $3.5million of incremental revenue for the three months ended June 30, 2006.  Revenue at the Grand Hotel Europe increased$1.2 million, or 10%, from $11.3 million in the three months ended June 30,2005 to $12.4 million for the three months ended June 30, 2006.  In Italy, the revenue for Hotel Splendidoincreased by $1.1 million, or 13%, from $7.8 million for the three months endedJune 30, 2005 to $8.8 million for the three months ended June 30, 2006.

On a same store basis, RevPAR in local currencyincreased by 7%, but in U.S. dollars this translated into an increase of 4%.

*North America*.  Revenue decreased by $0.4million, or 2%, from $23.4 million in the three months ended June 30, 2005 to$23.0 million in the three months ended June 30, 2006.  Revenue at the

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Windsor Court and Maroma, both affected by accountingfor insurance recoveries under SFAS No. 5, “Accounting for Contingencies”,decreased by $2.4 million, or 21%, from $11.4 million in the three months endedJune 30, 2005 to $9.0 million in the three months ended June 30, 2006.  Revenues at the remaining North Americanproperties increased by $2.0 million, or 17%, from $12.0 million in the threemonths ended June 30, 2005 to $14.0 million in the three months ended June 30,2006, with key performers being Keswick Hall, Casa de Sierra Nevada, La Samannaand the Inn at Perry Cabin.  Included inthe 2006 revenues are $2.0 million relating to real estate sales at KeswickHall compared with $0.4 million in the same period in 2005.

On a same store basis, RevPAR increased by 13% whichwas driven by approximately a 5% increase in occupancy.

*Rest of the World*.  Revenue increased by $2.2million, or 11%, from $20.2 million in the three months ended June 30, 2005 to$22.4 million in the three months ended June 30, 2006.  Southern Africa revenues increased by $1.0million, or 18%, from $5.5 million in the three months ended June 30, 2005 to$6.5 million in the three months ended June 30, 2006.  South America revenues increased by $0.4million, or 5%, from $7.6 million in the three months ended June 30, 2005 to$8.0 million in the three months ended June 30, 2006.  Revenues in the South Pacific increased by$0.8 million, or 11%, from $7.2 million in the three months ended June 30, 2005to $8.0 million in the three months ended June 30, 2006.

The RevPAR on a same store basis for the Rest of theWorld region increased by 16% in local currencies in the three months endedJune 30, 2006 compared to the three months ended June 30, 2005.  Approximately 9% of this increase was due toincreased occupancies at the hotels with 3% due to a higher achieved averagedaily rate.  This RevPAR increase inlocal currencies translated to a 12% increase when expressed in U.S. dollars.

*Hotel Management and Part-Ownership Interests. *Revenue increasedby $0.2 million, or 8%, from $2.6 million in the three months ended June 30,2005 to $2.8 million in the three months ended June 30, 2006, due to increasedrevenues at Charleston Place and the hotels in Peru.

*Restaurants. *Revenues for the three months toJune 30, 2006 were $5.5 million, down $0.3 million, or 5%, against the threemonths to June 30, 2005.  This wasprimarily due to the revenue impact of the disposal of the investment in Harry’sBar, and before taking account of the $9.5 million sale price from theinvestment.

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*Trains and Cruises. *Revenue increased by $0.4 million,or 2%, from $19.4 million in the three months ended June 30, 2005 to $19.8million in the three months ended June 30, 2006, due primarily to theperformance of PeruRail.

*Depreciation and amortization*

Depreciation and amortization increased by $0.7million, or 8%, from $8.6 million in the three months ended June 30, 2005 to$9.3 million in the three months ended June 30, 2006, due to the effect of theopening of the Hotel Caruso, Ravello, and capital expenditures during 2006,including the refurbishment works at Reids Palace Hotel, Madeira, LaResidencia, Mallorca and Copacabana Palace Hotel, Rio de Janeiro.

*Operating expenses*

Operating expenses increased by $4.0 million, or 7%,from $58.3 million in the three months ended June 30, 2005 to $62.3 million inthe three months ended June 30, 2006. The increase was in line with revenue increases, with operating expensesremaining at 46% of revenue for the three months ended June 30, 2006, the samelevel as for the three months ended June 30, 2005.

*Selling, general and administrative expenses*

Selling, general and administrative expenses increasedby $1.6 million, or 5%, from $35.0 million in the three months ended June 30,2005 to $36.6 million in the three months ended June 30, 2006.  The increase was in line with inflation, withselling, general and administrative expenses being 27%, 1% below the 28% ofrevenues for the three months to 2005.

*Margins*

Segment EBITDA margins (calculated as segment EBITDAas a percentage of revenue) for the three months ended June 30, 2006 for OEHwere 29%, up from 28% for the three months ended June 30, 2005.  The increase was due to increased margins inall geographic regions.  Margins inEurope increased from 39% in the three months ended June 30, 2005 to 40% in thethree months ended June 30, 2006. Margins in North America increased from 23% to 24% for the three monthsended June 30, 2006.  Margins in the Restof the World increased from 15% in the three months ended June 30, 2005 to 16%in the three months ended June 30, 2006.

*Earnings from operations before net finance costs*

Earnings from operations increased by $2.3 millionfrom earnings of $24.3 million in the three months ended June 30, 2005 to a

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profit of $26.6 million in the three months ended June30, 2006, due to the factors described above.

*Net finance costs*

Net finance costs increased by $7.3 million, from $6.2million for the three months ended June 30, 2005 to $13.5 million for the threemonths ended June 30, 2006.  The threemonths ended June 30, 2006 included a foreign exchange loss of $3.5 millioncompared to a gain of $0.5 million in the three months ended June 30, 2005.  Excluding this gain, net finance costsincreased by $3.3 million, or 49%, from $6.7 million for the three months endedJune 30, 2005 to $9.7 million for the three months ended June 30, 2006, due tothe impact of financing of new investments and increases in interest rates.

*Provision for income taxes*

The provision for income taxes decreased by $0.2million, from a provision of $3.4 million in the three months ended June 30,2005 to a provision of $3.2 million in the three months ended June 30,2006.  A valuation allowance establishedin respect of tax loss carry forwards at Bora Bora Lagoon Resort was reduced by$3.0 million in the quarter ended June 30, 2006, as OEH determined that it wasmore likely than not that these tax losses would be utilized in the future.

*Earnings from unconsolidated companies*

Earnings from unconsolidated companies decreased by$0.5 million, or 13%, from $3.8 million in the three months ended June 30, 2005to $3.3 million in the three months ended June 30, 2006.  This was mainly due to an increase intaxation on the Peruvian entities.

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Six months ended June 30, 2006 compared toSix months ended June 30, 2005

OEH’s operating results for the six months ended June30, 2006 and 2005, expressed as a percentage of revenue, were as follows:
| ** **                                     | ** ** | **Six months ended  June 30,** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                     | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| ** **                                     | ** ** | **%**                                         | ** ** | **%** | ** ** |
| Revenue:                                       |       |                                          |       |   |   |
| Hotels and restaurants                         |       | 87                                            |       | 87 |   |
| Tourist trains and cruises                     |       | 13                                            |       | 13 |   |
|                                           |       | 100                                           |       | 100 |   |
| Expenses:                                      |       |                                          |       |   |   |
| Depreciation and amortization                  |       | 9                                             |       | 8 |   |
| Operating                                      |       | 48                                            |       | 48 |   |
| Selling, general and administrative            |       | 32                                            |       | 32 |   |
| Gain on sale of  investment                    |       | (3                                            | )          | — |   |
| Net finance  costs                             |       | 10                                            |       | 5 |   |
| Earnings before  income taxes                  |       | 4                                             |       | 7 |   |
| Provision for  income taxes                    |       | 1                                             |       | 2 |   |
| Earnings from  unconsolidated companies        |       | 3                                             |       | 3 |   |
| Net earnings as a  percentage of total revenue |       | 6                                             |       | 8 |   |

 

Segment EBITDA of OEH’s operations for the six monthsended June 30, 2006 and 2005 are analyzed as follows (dollars in millions):
| ** **                  | ** ** | **Six months ended  June 30,** | ** ** |
|-----------------------------|------------|-----------------------------------------------|------------|
| ** **                  | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| Segment EBITDA:             |       |                                          |       |   |   |
| Owned hotels:               |       |                                          |       |   |   |
| Europe                      |       | $                                             | 17.1       |   | $ | 18.0 |   |
| North America               |       | 11.5                                          |       | 11.5 |   |
| Rest of the world           |       | 13.1                                          |       | 10.0 |   |
| Hotel management  interests |       | 9.6                                           |       | 8.6 |   |
| Restaurants                 |       | 2.6                                           |       | 2.7 |   |
| Tourist trains  and cruises |       | 5.5                                           |       | 5.1 |   |
| Central  overheads          |       | (9.8                                          | )          | (9.2 | ) |
| Gain on sale of  investment |       | 6.6                                           |       | — |   |
| Segment EBITDA              |       | $                                             | 56.2       |   | $ | 46.7 |   |

 

29

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The foregoing segmentEBITDA reconciles to net earnings as follows (dollars in millions):
| ** **                                                       | ** ** | **Six months ended  June 30,** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                       | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| Net earnings                                                     |       | $                                             | 12.3       |   | $ | 16.9 |   |
| Add:                                                             |       |                                          |       |   |   |
| Depreciation and  amortization                                   |       | 18.7                                          |       | 16.5 |   |
| Interest expense, net                                            |       | 19.0                                          |       | 13.8 |   |
| Foreign currency, net                                            |       | 2.7                                           |       | (4.1 | ) |
| Provision for income  taxes                                      |       | 1.2                                           |       | 3.1 |   |
| Share of provision for  income taxes of unconsolidated companies |       | 2.3                                           |       | 0.5 |   |
| Segment EBITDA                                                   |       | $                                             | 56.2       |   | $ | 46.7 |   |

 

Operating information for OEH’s owned hotels for thesix months ended June 30, 2006 and 2005 is as follows:
|                                  | ** ** | **Six months ended  June 30** | ** ** |
|----------------------------------|------------|----------------------------------------------|------------|
| ** **                       | ** ** | **2006**                                     | ** ** | **2005** | ** ** |
| ** **                       |       |                                         |       |   |   |
| Average Daily  Rate (in dollars) |       |                                         |       |   |   |
| Europe                           |       | 558                                          |       | 518 |   |
| North America                    |       | 333                                          |       | 349 |   |
| Rest of the world                |       | 282                                          |       | 274 |   |
| Worldwide                        |       | 376                                          |       | 373 |   |
|                             |       |                                         |       |   |   |
| Rooms Sold (in  thousands)       |       |                                         |       |   |   |
| Europe                           |       | 73                                           |       | 78 |   |
| North America                    |       | 77                                           |       | 83 |   |
| Rest of the world                |       | 107                                          |       | 95 |   |
| Worldwide                        |       | 257                                          |       | 256 |   |
|                             |       |                                         |       |   |   |
| RevPAR (in  dollars)             |       |                                         |       |   |   |
| Europe                           |       | 307                                          |       | 294 |   |
| North America                    |       | 246                                          |       | 239 |   |
| Rest of the world                |       | 178                                          |       | 158 |   |
| Worldwide                        |       | 238                                          |       | 225 |   |

 
| ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | **Change %** | ** ** |
|---------------------------------|------------|------------|------------|------------|------------|-------------------|------------|
| ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | **Dollars**       | ** ** | **Local  Currency** | ** ** |
| Same Store RevPAR (in  dollars) |       |       |       |       |       |              |       |   |   |
| Europe                          |       | 363        |       | 351        |       | 4                 | %          | 7 | % |
| North America                   |       | 336        |       | 306        |       | 10                | %          | 10 | % |
| Rest of the  world              |       | 178        |       | 158        |       | 13                | %          | 16 | % |
| Worldwide                       |       | 256        |       | 237        |       | 8                 | %          | 11 | % |

30

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*Overview*

The net earnings for the period were $12.3 million($0.31 per common share) on revenue of $214.0 million, compared with netearnings of $16.9 million ($0.46 per common share) on revenue of $206.7 millionin the prior year first half.  Thisrepresents a decrease of 27% in net earnings in the period over the prior yearperiod and a decrease of 33% in earnings per common share.

*Revenue*

Total revenue increased by $7.2 million, or 4%, from$206.8 million in the six months ended June 30, 2005 to $214.0 million in thesix months ended June 30, 2006.  Hotelsand restaurants revenue increased by $8.1 million, or 5%, from $179.2 millionin the six months ended June 30, 2005 to $187.3 million in the six months endedJune 30, 2006, and tourist trains and cruises decreased by $0.8 million, or 3%,from $27.5 million for the six months ended June 30, 2005 to $26.7 million forthe six months ended June 30, 2006.

The increase for hotels and restaurants was mainly dueto an increase at OEH’s owned hotels of $7.3 million, or 5%, from $163.8million in the six months ended June 30, 2005 to $171.1 million in the sixmonths ended June 30, 2006.  The revenue fromrestaurants decreased by $0.1 million, or 1%, from $11.0 million in the sixmonths ended June 30, 2005 to $10.9 million in the six months ended June 30,2006 which was mainly due to the impact of the sale of Harry’s Bar.

For owned hotels overall, same store RevPAR in U.S.dollars increased by 8% in the six months ending June 30, 2006 compared to thesix months ending June 30, 2005. Measured in local currencies this increase was 11%, of which 6% was dueto improved occupancy and 5% to higher achieved daily rate.

The change in revenue at owned hotels is analyzed on aregional basis as follows:

*Europe*.  Revenue increased by $2.1 million, or 3%,from $71.5 million for the six months ended June 30, 2005 to $73.6 million forthe six months ended June 30, 2006.  Thisincrease includes the revenue from the Hotel Caruso which opened in July 2005and produced an increase in revenue of $3.7 million, and the Grand HotelEurope, St Petersburg, which was acquired in February 2005, producing anincrease of $2.9 million.  The closure ofReids Palace Hotel in the first quarter and La Residencia accounted for a $5.6million drop in revenue for the six months ended June 30, 2005 compared withthe six months ended June 30, 2006.

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On a same store basis, RevPAR in local currencyincreased by 7% (7% in higher average daily rate).  In U.S. dollars this translated into anincrease of 4% as the euro was stronger against the dollar in the secondquarter of 2006 compared to the second quarter of 2005.

*North America*.  Revenue decreased by $1.0million, or 2%, from $46.9 million in the six months ended June 30, 2005 to$45.9 million in the six months ended June 30, 2006.  Included in the 2006 revenues are $4.2million relating to real estate sales at Keswick Hall compared with $1.0million in the same period in 2005.

On a same store basis, RevPAR increased by 10% whichwas driven by a 9% increase in occupancy and a 1% improvement in achievedaverage daily rate.

*Rest of the World*.  Revenue increased by $6.8million, or 15%, from $45.4 million in the six months ended June 30, 2005 to$52.2 million in the six months ended June 30, 2006.

The RevPAR on a same store basis for the Rest of theWorld region increased by 16% in local currencies in the six months ended June30, 2006 compared to the six months ended June 30, 2005.

*Hotel Management and Part-Ownership Interests. *Revenue increasedby $0.4 million, or 9%, from $4.4 million in the six months ended June 30, 2005to $4.8 million in the six months ended June 30, 2006, due to increasedrevenues at Charleston Place and the hotels in Peru.

*Restaurants. *Revenues for the six months to June30, 2006 were $10.0 million, the same as for the six months to June 30, 2005.

*Trains and Cruises. *Revenue decreased by $0.1 million,or nil%, from $29.1 million in the six months ended June 30, 2005 to $29.0million in the six months ended June 30, 2006, due primarily to the performanceof the U.K. day trains, offset by growth in PeruRail and VeniceSimplon-Orient-Express.

*Depreciation and amortization*

Depreciation and amortization increased by $2.2million, or 13%, from $16.5 million in the six months ended June 30, 2005 to$18.7 million in the six months ended June 30, 2006, primarily due to theeffect of acquisitions and capital expenditures in 2005/6.

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*Operating expenses*

Operating expenses increased by $3.3 million, or 3%,from $99.7 million in the six months ended June 30, 2005 to $103.0 million inthe six months ended June 30, 2006, in line with inflation.  As a percentage to revenue, operatingexpenses remained at 48% for the six months ended June 30, 2006.

*Selling, general and administrative expenses*

Selling, general and administrative expenses increasedby $2.4 million, or 4%, from $66.4 million in the six months ended June 30,2005 to $68.8 million in the six months ended June 30, 2006, in line withinflation.  As a percentage to revenue,operating expenses remained at 48% for the six months ended June 30, 2006.

*Margins*

Segment EBITDA margins (calculated as segment EBITDAas a percentage of revenue) for the six months ended June 30, 2006 for OEH werein line with the 22% for the six months ended June 30, 2005.  Margins in Europe decreased from 25% in thesix months ended June 30, 2005 to 23% in the six months ended June 30, 2006,primarily due to the closure of some European hotels in the three months toMarch 31, 2006.  Margins in North Americaincreased from 24% to 25% for the six months ended June 30, 2006.  Margins in the Rest of the World increasedfrom 22% in the six months ended June 30, 2005 to 25% in the six months endedJune 30, 2006.

*Earnings from operations before net finance costs*

Earnings from operations decreased by $0.8 million, or3%, from earnings of $24.2 million in the six months ended June 30, 2005 toearnings of $23.5 million in the six months ended June 30, 2006, due to thefactors described above.

*Net finance costs*

Net finance costs increased by $12.0 million, from$9.7 million for the six months ended June 30, 2005 to $21.8 million for thesix months ended June 30, 2006, which included a foreign exchange loss of $2.8million compared with a foreign exchange gain of $4.1 million in the six monthsended June 30, 2006.

*Provision for income taxes*

The provision for income taxes reduced by $1.9million, from a provision of $3.1 million in the six months ended June 30, 2005to a provision of $1.2 million in the six months ended June 30, 2006.  This provision is inclusive of $3.3 milliontax due in

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respect of the gain on sale of Harry’s Bar, and adeferred tax credit of $3.0 million in respect of losses realized at Bora BoraLagoon Resort due to the advancement of the property development project.  The Company is incorporated in Bermuda, whichdoes not impose an income tax.

*Earnings from unconsolidated companies*

Earnings from unconsolidated companies reduced by $0.4million, or 7%, from $5.5 million in the six months ended June 30, 2005 to $5.1million in the six months ended June 30, 2006. This was mainly due to increased tax provision in Peruvian investments.

**Liquidity and Capital Resources**

*Working Capital*

OEH had cash and cash equivalents of $55.9 million atJune 30, 2006, $17.5 million more than the $38.4 million at December 31,2005.  At June 30, 2006, the undrawnamounts available to OEH under its short-term lines of credit were $12.3million.   OEH’s total cash andavailability at June 30, 2006 was, therefore, $68.2 million including theundrawn short-term lines.

Current assets less current liabilities, including thecurrent portion of long-term debt, resulted in a working capital deficit of$53.0 million at June 30, 2006, a decrease in the working capital of $10.7million from a balance of $42.3 million deficit at December 31, 2005.  The overall decrease in working capital wascomprised of the following:

·                  an increase in current assets of $34.9 million, of which $17.5 millionwas an increase in cash, accounts receivable of $6.9 million, amounts due fromrelated parties of $0.7 million, prepaid expenses of $3.5 million, inventoriesof $3.3 million and real estate assets of $3.0 million; and

·                  an increase in current liabilities of $45.6 million, including thecurrent portion of long-term debt, which was due to increases in workingcapital facilities of $1.6 million, accounts payable of $7.8 million, accruedliabilities of $19.2 million, deferred revenue of $10.9 million and currentportion of long-term debt of $10.2 million, partly offset by decrease inamounts due to related parties of $4.1 million.

OEH’s business does not require the maintenance ofsignificant inventories or receivables and, therefore, working capital is notregarded as the most appropriate measure of liquidity.

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*Cash Flow*

*Operating Activities*.  Net cash flow from operatingactivities increased by $7.6 million from $28.2 million cash surplus for thesix months ended June 30, 2005 to $35.8 million for the six months ended June30, 2006.  The increase was primarily dueto improvements in segment EBITDA and the favorable movements in workingcapital balances (accounts receivable and accounts payable).

*Investing Activities*.  Cash used in investingactivities decreased by $81.2 million to $71.8 million for the six months endedJune 30, 2006, compared to $153.0 million for the six months ended June 30,2005.  This was mainly due to theacquisition of the Grand Hotel Europe in February 2005.  Current year acquisitions of $20.4 millionincluded the acquisition of Casa de Sierra Nevada, the remaining 25% interestin Maroma and a 50% interest in the Napasai hotel of the Pansea Hotels group.

Capital expenditure of $60.9 million included $11.9million for refurbishment of the Italian hotels, $6.4 million spent on ReidsPalace Hotel, $7.0 million for refurbishment of the Grand Hotel Europe, $7.3million for post-hurricane construction at Maroma, and $5.8 million spent onacquisition of wheelsets for Venice Simplon-Orient-Express.

The cash used in capital expenditures and acquisitionswas offset by $9.5 million proceeds from the sale of the Harry’s Bar investmentin June 2006.

*Financing Activities*.  Cash provided by financingactivities for the six months ended June 30, 2006 was $53.0 million compared to$119.4 million for the six months ended June 30, 2005, a decrease of $66.4million.  In the six months ended June30, 2006, OEH had proceeds from borrowings under long-term debt of $84.8million, compared to proceeds of $108.4 million for the six months ended June30, 2005 which included $58.5 million of finance on the Grand Hotel Europeacquisition.  The borrowings made for thesix months to June 30, 2006 included $54.4 million on Italian hotel facilities,$14.8 million drawn by Lapa Palace Hotel, $3.6 million borrowed by La Samanna,$4.9 million borrowed by La Residencia and $3.8 million borrowed by ReidsPalace Hotel.  In the six months endedJune 30, 2005, OEH had net proceeds from the issuance of common shares of$122.9 million, which were primarily used to pay down a revolving creditfacility secured on OEH’s Italian hotels ($91.0 million).  In 2006 OEH used most of the long-term debtproceeds for general corporate purposes including acquisitions and investments.

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*Capital Commitments*.  There were $14.4 million ofcapital commitments outstanding as of June 30, 2006 mainly on investments inowned hotels.

*Indebtedness*

At June 30, 2006, OEH had $649.3 million of long-termdebt secured by assets ($593.3 million net of cash), including the currentportion, which is repayable over periods of 1 to 11 years with a weighted averageinterest rate of 5.81%.  See Note 6 tothe financial statements regarding the maturity of long-term debt.

Approximately 46% of the outstanding principal wasdrawn in European euros and the balance primarily in U.S. dollars.  At June 30, 2006, 98% of borrowings of OEHwere in floating interest rates.

*Liquidity*

OEH expects to have available cash from operations andappropriate debt finance sufficient to fund its working capital requirements,capital expenditures, acquisitions and debt service for the foreseeable future.

**Recent Accounting Pronouncements**

As of June 30, 2006, theCompany’s significant accounting policies and estimates, which are described inNotes 1 and 15 to the financial statements in the Company’s 2005 Form 10-Kannual report, have not changed from December 31, 2005.

In July 2006, theFinancial Accounting Standards Board issued Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes”, an interpretation of SFAS No. 109 (“FIN 48”),which clarifies the accounting for uncertainty in tax positions.  The evaluation of a tax position under FIN 48is a two-step process.  The first step isrecognition, under which tax positions taken or expected to be taken in a taxreturn should be recognized only if those positions are more likely than not ofbeing sustained upon examination, based on the technical merits of theposition.  In evaluating whether a taxposition has met the more likely than not recognition threshold, it should bepresumed that the position will be examined by the relevant taxing authoritythat would have full knowledge of all relevant information.  The second step is measurement, under whichtax positions that meet the recognition criteria are measured at the largestamount of benefit that is greater than 50 percent likely of being recognizedupon ultimate settlement.

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FIN 48 also providesguidance on de-recognition, classification, interest and penalties, accountingin interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006and is effective for the Company in the first quarter of the year beginningJanuary 1, 2007.  The Company iscurrently assessing FIN 48 and has not yet determined the impact that theadoption of this interpretation will have on its financial position or resultsof operations.

## **CriticalAccounting Policies**

For a discussion ofthese, see under the heading “Critical Accounting Policies” in Item 7 –Management’s Discussion and Analysis in the Company’s 2005 Form 10-K annualreport.

**ITEM 3.****                          Quantitativeand Qualitative Disclosures about Market Risk**

OEH is exposed to market risk from changes in interestrates and foreign currency exchange rates. These exposures are monitored and managed as part of OEH’s overall riskmanagement program, which recognizes the unpredictability of financial marketsand seeks to mitigate material adverse effects on consolidated earnings andcash flows.  OEH does not hold marketrate sensitive financial instruments for trading purposes.

The market risk relating to interest rates arisesmainly from the financing activities of OEH. Earnings are affected by changesin interest rates on borrowings, principally based on U.S. dollar LIBOR andEURIBOR, and on short-term cash investments. If interest rates increased by 10%, with all other variables heldconstant, annual net finance costs of OEH would have increased by approximately$3,200,000 on an annual basis based on borrowings at June 30, 2006. Theinterest rates on substantially all of OEH’s long-term debt are adjustedregularly to reflect current market rates. Accordingly, the carrying amounts approximate fair value.

The market risk relating to foreign currencies and itseffects have not changed materially during the first six months of 2006 fromthose described in the Company’s 2005 Form 10-K annual report.

**ITEM 4.****                         ****Controls and Procedures**

TheCompany’s chief executive and financial officers have evaluated theeffectiveness of the Company’s disclosure controls and procedures (as definedin SEC Rule 13a-15(e)) as

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ofJune 30, 2006 and, based on that evaluation, have concluded those disclosurecontrols and procedures are effective as of that date.  There have been no changes in the Company’sinternal control over financial reporting (as defined in SEC Rule 13a-15(f))during the second quarter of 2006 that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

Itshould be noted that any system of controls, however well designed andoperated, can provide only reasonable, and not absolute, assurance that theobjectives of the system are met such as prevention and detection ofmis-statement.  In addition, the designof any control system is based in part upon certain assumptions about thelikelihood of future events.  Controlsmay become inadequate because of changes in conditions, or the degree ofcompliance with policies or procedures may deteriorate, for example.  Because of these and other inherentlimitations of control systems, there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions.

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**PART II – OTHER INFORMATION**

**ITEM 4.****                          Submissionof Matters to a Vote of Security Holders**

The Company convened and held an annual generalmeeting of shareholders on June 5, 2006. The holders of Class A and B common shares, voting together, (i) dulyelected John D. Campbell, James B. Hurlock, Prudence M. Leith, J. RobertLovejoy, Georg R. Rafael, James B. Sherwood and Simon M.C. Sherwood asdirectors of the Company, (ii) duly confirmed amendments to the Company’sBye-Laws to permit internet or email delivery of notices or other materials tothe Company’s shareholders when permitted by Bermuda law and New York StockExchange rules, and (iii) duly appointed Deloitte & Touche LLP, a U.S.registered independent public accounting firm, as the Company’s independentauditor.  The number of votes on eachmatter was as follows:

(i)            Electionof directors:

| Name            | ** ** | **For**    | ** ** | **Authority Withheld** | ** ** |
|-----------------|------------|------------|------------|------------------------|------------|
|            |       |       |       |                   |       |
| J.D. Campbell   |       | 21,859,017 |       | 37,216                 |       |
| J.B. Hurlock    |       | 21,875,402 |       | 20,831                 |       |
| P.M. Leith      |       | 21,894,015 |       | 22,180                 |       |
| J.R. Lovejoy    |       | 21,875,432 |       | 20,801                 |       |
| G.R. Rafael     |       | 21,875,425 |       | 20,808                 |       |
| J.B. Sherwood   |       | 21,847,482 |       | 48,751                 |       |
| S.M.C. Sherwood |       | 21,847,504 |       | 48,729                 |       |

 

(ii)           Amendmentof Bye-Laws:  For 21,879,951, Against4,696, and Abstain 11,586.

(iii)          Appointmentof independent auditor: For 21,883,153, Against 12,117, and Abstain 963.

**ITEM 6.  Exhibits**

Theindex to exhibits appears below, on the page immediately following thesignature page to this report.

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**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|                       | ORIENT-EXPRESS HOTELS LTD. |
|-----------------------|----------------------------|
|                  |                       |   |
|                  |                       |   |
|                  | By:                        | /s/ P. M. White |
|                  |                       | Paul M. White |   |
|                  |                       | Vice President -  Finance |   |
|                  |                       | and Chief  Financial Officer |   |
|                  |                       | (Principal  Accounting Officer) |   |
|                  |                       |   |
|                  |                       |   |
| Dated: August 8, 2006 |                       |   |

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**EXHIBIT INDEX**
| 3.1                                                                                                                                | – | Memorandum of Association and Certificate of  Incorporation of the Company, filed as Exhibit 3.1 to Amendment  |
|------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------|
| No. 2 to the Company’s Registration Statement on  Form S-1 (Registration No. 333-12030) and incorporated herein by reference. |
|                                                                                                                               |
| 3.2                                                                                                                                | – | Bye-Laws of the Company, filed as Exhibit 3 to the  Company’s Form 8-K Current Report on July 6, 2006 and |
| incorporated herein by reference.                                                                                                  |
|                                                                                                                               |
| 31                                                                                                                                 | – | Rule 13a-14(a)/15d-14(a) Certifications.                                                                       |
|                                                                                                                               |   |                                                                                                           |
| 32                                                                                                                                 | – | Section 1350 Certification.                                                                                    |

 

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